Trusts & Estates Law/Trust Ownership

QuestionOk. I am wondering if a trust can own a life insurance policy on a person? I do understand say that I can get a life insurance policy on myself or another, but was wondering if the ownership of that policy be changed to a trust. Hopefully you understand where I am trying to go with that. Thank you for your help and response in this matter.

AnswerThanks for your question. Since this is a matter of "federal" law I can answer it even though you are not in California.

The short answer is ... life insurance trusts are very common. So, yes, a trust can indeed own a life insurance policy. Usually the life insurance trust is "irrevocable" so that the "payoff value" of the policy is not part of the insured's estate when s/he dies (so, for example if the life insurance policy were $20 million and the insured owned it, it would be subject to estate tax when the insured person dies - but if that same $20 million policy is owned by a properly drafted life insurance trust, it is completely estate tax free when the insured person dies).

If the trust is established before the insurance policy has been issued and the trustee of the trust applies for the insurance, then the policy proceeds are "protected" from the moment the policy is issued. But if the policy has already been issued and then it is transferred to an ILIT (irrevocable life insurance trust), then there is a 3 year "look back" period - that is, if the policy owner transfers the policy to an ILIT after the policy has been issued, then the insured must live at least 3 years or the value will be included in his/her estate. In addition, if the policy had any "value" between the date it was issued and the date it was transferred to the ILIT (for example, the policy earned interest or dividends, etc.), then that "value" is considered a gift and potentially is subject to gift tax.

Hope that helps.

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Wow....I will say that again, WOW! You have answered all the questions I was in need of in one reply. Thank you so much for sharing your knowledge with me!

Expertise

I am a licensed attorney in California. I am available to answer questions about probating estates, preparing wills and trusts, administering estates and trusts, forming family limited partnerships and limited liability companies, and establishing a wide variety of estate and gift tax-sensitive trusts (charitable trusts, children's trusts, irrevocable life insurance trusts, etc.).

I can also answer questions regarding the preparation of estate tax returns (Form 706) in taxable estates. Please note that I do not prepare trust income tax returns and cannot provide you with any information about that type of return.

Please note: I am only able to practice law in the State of California. I cannot answer specific questions about other states' laws; I can only provide some "general" information that may or may not apply to your situation.

Experience

I have practiced California estate, gift-planning, and probate law exclusively since 1991. I am certified as a specialist in estate planning and probate law by the California State Bar Board of Legal Specialization (there are less than 125 such specialists practicing in Santa Clara County and fewer than 7,000 practicing in California - out of over 170,000 lawyers statewide).

I have served as an Instructor in the CFP (certificate in financial planning) program at University of California – Santa Cruz, teaching the estate planning segment.

OrganizationsSilicon Valley Bar Association
Wealth Counsel
Wealth Advisors' Forum
Executive Committee Member, Solo and Small Firm Section of the California State Bar (appointed to a 3 year term by the California State Bar Board of Governors)

Education/CredentialsI received my law degree (J.D.) from University of Denver Law School in 1975. I was admitted to the Colorado Bar in 1975 and to the California Bar in 1977 (NOTE: although I am a member of the Colorado Bar, I am on INACTIVE status there). I earned an M.B.A. in 1982, and I earned a Masters Degree in Taxation Law (LLM) at Golden Gate University Law School in 2010 (with honors).

More at:
http://www.calprobate.com

Awards and Honors2007, 2008, 2009, 2010, 2011, & 2012 - chosen as a "SuperLawyer" - one of the top 5% of Northern California lawyers practicing in the estate planning and probate area (www.superlawyers.com). Avvo Rating of 10.0/10.0